Lending Criteria

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GUEST OBSERVER
What used to be known as a requirement to lend responsibly is now regarded as red tape.
The National Consumer Credit Protection Act introduced by the Rudd government after the global financial crisis introduced responsible lending obligations that required lenders to ensure the loans they were offering were “<a href="https://www.asic.gov.au/regulatory-resources/credit/responsible-lending/" target="_blank">not unsuitable</a>” for borrowers.
No longer. If passed into law, changes announced by treasurer Josh Frydenberg last week in the leadup to the budget will remove the obligation for most lenders, allowing them to rely instead on the <a href="https://ministers.treasury.gov.au/sites/ministers.treasury.gov.au/files/2020-09/Consumer-credit-reforms-fact-sheet.pdf" target="_blank">information presented to them by borrowers</a>.
In the treasurer’s words, it will replace the current principle of “lender beware” with “<a href="https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/simplifying-access-credit-consumers-and-small" target="_blank">borrower responsibility</a>”.
He says it will make it easier for consumers to borrow, which would have been a disquieting prospect during the borrowing and house price boom that peaked three years ago <a href="https://www.abs.gov.au/statistics/economy/finance/lending-indicators/latest-release">under the old rules</a> and was only slowed by intervention from the <a href="https://www.apra.gov.au/news-and-publications/apra-announces-further-measures-to-reinforce-sound-residential-mortgage" target="_blank">Australian Prudential Regulation Authority</a> (APRA).
Safeguards offered…
Frydenberg says there will be safeguards. Lenders will have to comply with APRA lending standards. The special restrictions on “small amount credit contracts” (a discrete category that covers payday loans) will remain in place. Debt management firms will be required to hold licences.
But the provisions will not require lenders to assess the crucial question of whether a particular product is suitable for an individual borrower.
For the first time in a decade, that will be up to the borrower.
Lenders might decide to do that, but they won’t have to. What the treasurer calls “borrower responsibility” will become “buyer beware”.
Lenders will be obliged to be members of the Australian Financial Complaints Authority and have to act efficiently, honestly and fairly.
And members of the Banking Association will be subject to a code of practice that requires them to exercise the care and skill of a diligent and prudent banker.
But the duty of a banker is to the bank. That means a banker’s job is to ensure that a loan can be recovered, perhaps by selling property, rather than that the borrower can afford to make the payments.
…but bankers work for banks
When the financial crisis struck, equity was stripped from family homes by lenders looking after themselves. The new proposed changes would allow it to happen again.
The government says lenders have had to devote substantial resources to checking incorrect and misleading information provided by borrowers.
But much of it would have come from mortgage brokers acting on behalf of borrowers but being paid as if they were lenders, receiving a commission related to the size of the loan.
And brokers work for banks
The Royal Commission recommended that brokers be subject to a new “best interest” requirement, which is due to come in in January, untested, just before the responsible lending requirement is withdrawn in April.
Commissioner Kenneth Hayne also recommended banning brokers’ commissions and having them accept payment instead in the form of an upfront fee paid by the borrower not the lender. The government at first accepted and then rejected the recommendation.
Even where they are not encouraged to over-borrow, consumers are often making decisions under stress or blinded by optimism bias.
Even where entirely honest they can be unable to make reliable predictions about the level of credit they can bear.
If the responsible lending rules we have are considered too prescriptive, complex and onerous as the treasurer says, a reasonable approach would be to make them simpler and principles-based rather than prescriptive as recommended by Commissioner Hayne.
The Australian Law Reform Commission has just commenced an inquiry into <a href="https://www.alrc.gov.au/inquiry/review-of-the-legislative-framework-for-corporations-and-financial-services-regulation/">how to simplify Australia’s complex financial services regime</a>.
The government might have asked it for a heads up or kept the responsible lending obligations in place until it saw what it had to say.<img src="https://counter.theconversation.com/content/146916/count.gif?distributor=republish-lightbox-basic" alt="The Conversation" width="1" height="1" style="border: none !important; box-shadow: none !important; margin: 0 !important; max-height: 1px !important; max-width: 1px !important; min-height: 1px !important; min-width: 1px !important; opacity: 0 !important; outline: none !important; padding: 0 !important; text-shadow: none !important;">
<a href="https://theconversation.com/profiles/jeannie-marie-paterson-6367">Jeannie Marie Paterson</a>, Professor of Law, <a href="https://theconversation.com/institutions/university-of-melbourne-722">University of Melbourne</a>; <a href="https://theconversation.com/profiles/elise-bant-467235">Elise Bant</a>, Professor of Law, <a href="https://theconversation.com/institutions/university-of-western-australia-1067">University of Western Australia</a>, and <a href="https://theconversation.com/profiles/nicola-howell-1160247">Nicola Howell</a>, Senior lecturer, <a href="https://theconversation.com/institutions/queensland-university-of-technology-847">Queensland University of Technology</a>
This article is republished from <a href="https://theconversation.com">The Conversation</a> under a Creative Commons license. Read the <a href="https://theconversation.com/its-about-to-become-easier-to-lend-irresponsibly-to-help-the-recovery-146916">original article</a>.
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j.ballantyne1990-6AQqhLzZaK

It will become easier to lend irresponsibly, to help the recovery

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Recent tightening of lending criteria in the banking sector has not only dramatically reduced financing options for companies, but has also created a perfect storm for what could be described as “predatory” lending practices by some second-tier credit providers.
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This year has seen the big four banks impose stricter lending criteria and companies seeking loans on prime secured assets, second mortgages or unsecured cash flow loans have been forced to turn to private equity style second-tier lenders. 
The largely unregulated and agile capital from second tier lenders is attracting borrowers simply as they have no other choice and from the outset borrowers are disadvantaged. 
This is particularly prevalent in commercial property transactions and development funding. Lenders can see in profitable deals there is available uplift and margin, making the value proposition of post transaction litigation a retrospective unappealing action where money has been made by the borrower. 
Second-tier lenders leverage the fact that funds can be advanced quickly with decision-makers assessing deals much more promptly than the big banks can. However, access to funds in the second-tier market can come with significant financial costs. 
Corporate borrowers can often be burdened by unexpected and significant fees when they discharge their obligations. The fine print in loan documentation can stipulate higher interest rates than what has been used in marketing materials. If there is a breach of the terms, the higher rate will apply and the discounted rate evaporates. 
Another “predator” technique is reliance on strict notice provisions to discharge loans. There are cases when notice is provided, but has not taken the form required under the terms, such as an email instead of a fax. Lenders will reject that effective notice has been given and continue the loan for an additional 
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period, or apply default interest based on defective notice if the loan extends beyond the original term. 
The biggest sting comes when borrowers seek to discharge a loan and settle the arrangement, as in the depths of the paperwork there is usually a “term fee” or “capital repayment fee“. On settlement on the loan, lenders claim a percentage of capital and this is typically an unexpected cost and a significant burden for the borrower. 
Lenders cite risk as the reason for these fees, state that the terms and conditions have disclosed all fees and also rely on a Lawyer’s Certificate to confirm that the terms have been explained to the borrower. 
Furthermore, if a lender considers that the borrower is a future litigation risk, they will demand a Deed of Release be signed to absolve the lender from any claims as a condition of settlement. This effectively strips the borrower of future rights and can leave them in a position where loans rack up exorbitant interest at super-charged interest rates in addition to hefty default fees without recourse. 
We desperately need to maintain quality lending practices and it is now up to the big four banks to develop funding solutions for corporate Australia and for regulatory bodies to open their eyes and look at ways to rein in second-tier lenders exploiting the market. 
Francis Farmakidis is a partner, at <a href="http://vobis.com.au/" target="_blank">Vobis Equity Attorneys</a>.
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jrobinson-rf4aSBido9

Warning that predatory second tier lenders are circling property sector

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Westpac, the country's second largest lender, was just trying to make sure that customers are not in too much debt when interest rates rise as part of its focus on responsible lending, according to the chief executive of Westpac Consumer Bank.
George Frazis aired his views on Ross Greenwood’s show on 2GB.
To a question on banks conducting stress tests in the eventuality of a rise in interest rates, Frazis said Westpac’s focus was that the bank was doing the right thing by the customers.
He said when assessing a customer’s affordability of a home loan application, “we add in the order of 2 to 2.5 percent interest rate increase on that loan to make sure you are able to withstand that”.
There’s other checks and balances as well “to ensure you are able to afford that… because what we want to do is to ensure that customers are able to keep their home and continue servicing the home loan and paying off the home loan over the life of the home loan”.
So it was in the customers interest and the bank’s interest to ensure that customers are not in too much debt.
On whether mortgage brokers were being diligent in doing those checks and balances for home loan applications, Frazis said when it comes to serviceability (of loans) the banks double check the analysis to ensure that the customer can afford that.
He said the bank verifies a customer’s income level to make sure it's correct. 
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jonathanchancellor-7SQnKwU6yx

Westpac calculates up to 2.5 percent higher interest rates on loans to stress test customers: George Frazis

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The tougher lending criteria being imposed by the major banks, particularly in regards to living expenses, is silly and irrelevant, the former CEO of the Australian Institute of Professional Brokers has argued.
The tougher rules are hurting prime borrowers, said founder and owner of Melbourne-based Universal Wealth Management Maria Rigoni, speaking to MPA's sister publication Australian Broker.
“Lending criteria is getting harder and harder so really good, credit-worthy borrowers are being declined loans on the most simple and silly of reasons.
“What is happening is people are finding it harder and harder to borrow or refinance. You might have all these cheaper options out there, but with the way that [the banks] are squeezing down how much people can borrow, consumers are being stuck in high interest rate loans and you can’t move.” Rigoni’s argument comes just after ANZ announced in a note to mortgage brokers that it would change the way minimum living expenses were calculated when it decides on home loans.
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Lending Criteria

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